How the Chinese channel rural industry's profits into agriculture

China's half million villages contain about two million nonfarm enterprises owned by communes and brigades. In addition, there are a large and growing number of enterprises operated by the production teams themselves; these, however, being mostly small and seasonal, are not normally included in the Chinese statistics, although it should be remembered that they undoubtedly add significantly to local accumulation and investment, especially investment in agriculture.

In 1981, 51.8 percent of commune and brigade enterprises were industrial; 30 percent were agricultural in the wider sense (animal husbandry, forestry, fruit growing, fish farming, etc.); 5.6 percent were in transport; 9.3 percent were in commerce and services; and 3.3 percent were in building. Industry is therefore the most important form of village enterprise, and in gross output value and generation of employment it looms even larger. This, however, does not mean that each and every local authority in China has concentrated on the development of industry; on the contrary, there are wide variations in the type of enterprise according to local conditions. At the same time, establishment of small machine-based industries is regarded as an indispensable element in village development because they provide a core of potential mechanization and because their labour productivity is relatively high.

Local industry (leaving aside other forms of local enterprise) already contributes 10 percent of the gross output value of Chinese industry as a whole.

More significant, however, is the fact that an average commune and brigade enterprise generates approximately 20 percent of rural employment and almost 30 percent of rural incomes.

Village enterprises are not evenly distributed throughout China. Although they need little capital and use limited resources, they cannot be created out of nothing, and consequently enterprises have proliferated most easily in those parts of China that have historically been most prosperous. Broadly speaking, the coastal provinces have led the way: Jiangsu, Zhejiang, Shandong and Guangdong. In contrast, there has been very little development indeed in the semiarid provinces of the Northwest. One Jiangsu county alone (Wuxi) has more commune and brigade enterprises than the whole of Ningxia or Qinghai.

Starting point

The most common starting point for village industrialization has been a small factory for the manufacture of farm tools, the repair of farm machinery and the production of simple spare parts for farm machines. Once the first machine-tools are installed for this purpose and their use learned, the process of development can begin. The range of industrial production now practiced in China's villages is almost unlimited.

Village enterprises are not owned by the state and do not form a part of the planned economy, although perhaps 20 percent of their output is done on contract to state-sector firms. Nor are the enterprises owned by their own work-force. They are owned by the local rural community organized in the commune and its component units, the brigades. The relationship between the enterprise and the brigade or commune is now the subject of experiment, but in principle the enterprise is a branch of the collective, which receives most of its profits. It is the collective that accumulates and invests, not the enterprises. This is what makes possible the flexible allocation of investment funds and in particular the investment of part of the surplus created by nonagricultural enterprises in agriculture.

There are differences between enterprises at commune level and at brigade level. Most commune enterprises are modern factories, though usually of a simple kind. Most brigade enterprises are of the workshop type, with manual labour still predominating, although it is possible to find brigade enterprises that are both large and modern. Commune enterprises are almost all in operation throughout the year. Brigade enterprises are usually seasonal, at least in the sense that the work-force may be dispersed to return to farming at the peaks of the agricultural year.

Nonagricultural village enterprises in China have had a checkered history. They were founded during the Great Leap Forward of 1958, but were on the whole unsuccessful, largely because the resources used to found them were requisitioned from the peasants by coercion. On paper there was an explosion of local enterprise, but it left little behind but debris, and thereafter little encouragement was given to the movement throughout the 1960s. From 1970, however, the Maoist regime (restored to power) began once more to press for the diversification of the rural economy. There was a rapid and sustained growth in the early 1970s, but to some extent this growth was artificial, being prejudiced by the recurrence (although on a far smaller scale) of the coercive pressures used in the Great Leap. Since 1976, and more especially since 1978, these pressures have been withdrawn. Enterprise at commune and brigade levels must now develop out of its own profits; communes cannot requisition the property of brigades, nor brigades the property of teams. The resources of the teams can be used by the higher levels only with their consent, and teams must be compensated for labour withdrawn from agriculture for employment in the enterprises.

Perhaps the most significant development since 1978 has been the acceptance of freer marketing by village enterprises which are now permitted to find their own customers and negotiate with them. Their main customers are, of course, the state trading organs and the supply and marketing cooperatives, and (to a much lesser extent) state-owned department stores and other commercial outlets, the export agencies and state-sector firms. Although the state fixes the prices of all important products, there is keen quality competition among rural enterprises and the distribution of the products of a successful local enterprise may be nationwide.

Value rising

On the basis of these new policies, the output value of village enterprise has been rising rapidly. In a rural population the greater part of whose average income has in the past been represented by food and fuel, the increased income from nonfarming enterprise creates a disproportionate addition to the percentage of disposable purchasing power, and in so far as this rapidly increasing purchasing power is spent on the products of the local enterprise sector, an enormous stimulus is provided for further rural industrialization. The increasing collective income from the profits of village enterprise at the same time makes it possible, at least in villages where development has been more than average, to maintain an accumulation rate of 25-30 percent.

The economic arguments the Chinese have used since 1958 to justify the encouragement of rural enterprise are not new. Such enterprises need very little capital and their gestation periods are nearly nil. They can make use of surplus rural labour (in China now about 30 percent and still growing). They can use resources too scattered to be useful to the state planners. They can mobilize rural savings and even, by revealing economic opportunities unperceived before, stimulate still more savings. They can increase the supply of incentive goods without state investment. They can provide a hedge against dependence on uncertain harvests. They can increase peasant incomes and peasant purchasing power and this in turn can stimulate the state sector of the economy. Last, and most important of all, they can provide for the modernization of agriculture the funds that agriculture itself cannot supply.

Ideological as well as economic arguments were also used by the Maoists who first created village enterprise, and these arguments are still used unchanged by the post-Mao regime. These arguments are: that the maximization of economic decision-making power and the accumulation of capital in the hands of the rural masses provides the best antidote to bureaucratism; that a high level of popular participation in development is at one and the same time the most rapid path to economic development and the surest path to socialism; that the diversification and the industrialization of the village economy is the best way to eliminate "the three great differences" between town and country, industry and agriculture and mental and manual labour; finally, that the educational fallout from the introduction of simple modem technology in the villages, owned and operated by the peasant community itself, is at least as important as the economic effects. From the point of view of past Communist practice, however, the most important principle behind the policy arises from Mao Zedong's repudiation of the Preobrazhensky view that the capital for industrialization in a socialist country must be extracted from the peasantry, and Mao's insistence to the contrary that in a peasant country the chief driving force of economic development can only be the increase of peasant purchasing power.

Successive Chinese governments have consistently emphasized that the main purpose of the development of commune and brigade enterprise is to serve agriculture. It does so in several ways: by directly producing agricultural inputs, by maintaining a flow of incentive goods, and by creating surpluses that can be used for direct investment in agriculture. Investment in agriculture is of two kinds: the purchase of annual inputs such as chemical fertilizers and tractor fuel; and fixed long-term investments such as water conservancy construction, the leveling of land and mechanization. In China, however, the word "agriculture" refers only to arable farming. Other activities that elsewhere would be considered part of agriculture - such as the keeping of cattle, pigs, poultry, the growing of fruit trees or vegetables - are in China included in "enterprises"; but to confuse the issue, these ancillary forms of farming are classified as "agricultural" enterprises.

The Chinese Government does not of course assume that all the funds needed for the modernization of agriculture can in the immediate future be derived only from the rural communities themselves. State assistance to agriculture is still the primary source. Only in a handful of counties where commune and brigade enterprise is most highly developed does the contribution to agricultural investment of the local community itself exceed the contribution of the state. Nevertheless, the expectation is that as the diversified development of the rural communities proceeds, this situation will become general. This of course does not mean that the state's contribution to investment in agriculture will diminish in absolute terms.

Particular cases

A statistical analysis of the relationship between enterprise accumulation and agriculture is not at present possible. The decentralization of decision making prevents even the Bureau of Commune and Brigade Enterprise itself from gathering adequate figures, especially as such figures are not needed for state planning. What follows here, therefore, is drawn from particular cases observed in China between April and June 1982, but known from previous documentary study to be typical of general development.

The author stayed at this time in four counties in three provinces: Qixia county in Shandong, Wu and Shazhou counties in Jiangsu and Hongya county in Sichuan. Qixia represented a good average level of development for East China. The two Jiangsu counties, on fertile well-watered soil and ringed by major cities, represented the peak of present development. Hongya is a remote county dependent for further development entirely on the resources of its mountains. In all these counties except Shazhou, considerably more than half of the area was hill or mountain, which now play a considerable part in the diversification of the rural economy; Hongya county is thus only the extreme case of conditions that are widespread in China, only one-fifth of the land surface of which is level arable, indeed, one of the most fundamental and most fascinating new features of the Chinese farming economy, in which historically (in contrast to that of Europe) productive relationships between hill and plain have played little pad, is the attempt now being made to bring the high land into the farming ecology.

Qixia is a rural county three hours' drive from the port of Yantau. It is thus well beyond the immediate stimulus of city markets. However, it has easy access by a good network of dirt roads to the main railway line from Jinan to Yantai. There are 149 nonstate enterprises at county level. Its 18 communes own 194 enterprises, and its 939 brigades own 5 736. Commune enterprises employ on average 43 persons and brigade enterprises 12. These enterprises (both industrial and nonindustrial) produced in 1981 59.2 percent of the total output value of the county.

Nonstate enterprises include phosphate, lead and zinc mines; apple, pear and peach orchards (historically a Shandong specialty); plants for the production of farm tools and machinery, chemical fertilizers, bricks and cement; and a wide range of small consumer-goods industries. About 20 percent of output value at commune and brigade levels represents subcontracts from state-sector factories, typically the production of components on simple machine-tools. About 10 percent by value of their products is exported, including arts and crafts products, straw products, fruit products and garments; some of these trades provide not only factory employment but also domestic spare-time employment for 90 000 individual peasants or their wives.

The most developed brigade in the county is Taocun brigade; 73.5 percent of its gross output value comes from the diversified economy, and as a result the average per caput income is 430 RMB, or about three times the national average. Only 35 percent of the labour force work in arable farming.

As a result of the investment in agriculture of funds drawn from the profits of the enterprises, grain output per mou is said to have risen sevenfold since 1955. Taocun in 1955 was an area of thin soil, broken land and sparse water resources, with very low grain yields. Since 1968, however, land has been levelled using explosives, an underground reservoir with an automatic sluice-gate has been built, a river dammed and water conducted by a 21-km canal. To finance these new facilities at a cost of over a million RMB, the brigade created 32 new enterprises, and the irrigation and other works were paid for entirely out of brigade funds generated by the enterprises. These profits also provided the funds to establish and maintain a nursery, kindergarten, primary school and middle school, and a cooperative clinic. Education and medical services are free. There is a system of old-age pensions.

Profits of enterprise

The achievements of Taocun are of course exceptional. Natural conditions there before development began were such as to offer enormous opportunities for profitable investment in irrigation and soil improvement. The significant point is that the funds for these large investments (1 000 RMB per family in only 10 years) came entirely from the profits of nonfarming enterprises that had nil or negligible gestation periods and employed an insignificant amount of initial capital.

Five other communes and brigades studied in Qixia county showed a similar dependence on the profits of enterprises. Where half or more of the labour force is employed in nonfarming enterprises, the rate of public accumulation is between 25 and 30 percent of gross income, and 80 percent or more of this accumulation is derived from enterprise profits. In such villages, 65 percent or more of the land is irrigated, while irrigation, pest and disease control, ploughing and threshing are usually mechanized in simple forms. The new prosperity created was dramatically apparent in the rapidity with which the villages have been almost entirely rebuilt out of peasant savings mainly in the last three years, during which rainfall in East Shandong has only been half the average.

The standard of living in the area can differ sharply from commune to commune and from brigade to brigade. Of course, natural conditions do not provide equal opportunities and some villages show more initiative than others. To establish any precise correlations between the success of nonfarming enterprises and per caput incomes or yields of crops is not possible, but there can be no doubt that in this and in the other areas of China visited high yields in agriculture, mechanization of farming operations and a higher standard of living are strongly associated with the development of commune and brigade enter, prise.

Natural foundation

Wu county in Jiangsu province is a hilly county with a long coastline on the freshwater Taihu Lake and a moist Mediterranean-type climate. Unlike most neighbouring counties, it does not have a strong tradition of handicrafts and therefore has not as yet sought to concentrate on industrial development. On the other hand, the Suchow area in which Wu is situated has been famous for centuries for the diversity and the quality of the produce of its land and water, and this has been taken as the natural foundation for further development. Dongshan commune is typical of the district. It is a hilly peninsula on the Taihu Lake. Although it has a population of about 50 000, of which 90 percent is rural, the total land surface is only about .07 ha per caput, and less than a quarter of this land is level arable. Fruit groves on the slopes occupy twice as much land as arable farming, and fish farming occupies a greater area than grain. Commune and brigade industries are mostly in building and building materials, the manufacture of tools for cultivation and the processing of fruit, but there are also factories or workshops producing towels, paint and carpenter's glue. The most profitable development has been in the form of the extension of pumped irrigation up the hillslopes to increase the area of mandarin oranges, persimmons, arbutus, cumquats, ginkos and other similar fruits. Second in importance is the construction of ponds for fish farming on the Taihu lake bed. Third is the planting of mulberries, partly at the expense of grain land.

Although industrial development is limited, commune and brigade industries account for about half of gross output value and 68 percent of total accumulation. In 1981, total investment of commune and brigade funds was 1231500 RMB, invested as follows:

This is a typical pattern of investment. By far the largest investment of the profits of local industry is in the further development of industry itself. The second largest investment is in agriculture. Welfare investment at the level of per caput incomes typified by Dongshan (264 RMB) is very small, but usually grows rapidly as incomes exceed about 300 RMB per caput per annum.

These figures, however, understate investment in fruit cultivation by a large, though unknown, amount because in this area the greater part of the funds for the extension of irrigated fruit groves have come from the teams and are derived from small team enterprises whose operations are not officially recorded.

The second county visited in the Suchow area, Shazhou, offered a complete contrast. It is an almost unbroken expanse of well-watered paddy-land on the banks of the Yangtse estuary. It was formerly a part of Changshu, one of the three adjacent counties of which it was said that if these three had a bad harvest the whole empire had to tighten its belt. Highly developed and highly productive by premodern standards, it lacks some of the opportunities available in historically less favoured places. It has no room for Qixia's orchards, Wu's orange groves or Hongya's forests and pastures, and its levels of grain output were already relatively high before 1949. Its main problem is the Yangtse's flood-waters, and its main advantage is easy access to the markets of Shanghai and Suchow. County policy therefore has been to concentrate on the development of industry in order to raise funds for flood prevention. The most successful brigade is Ouqiao brigade of Miacqiao commune. Here, in an area to all appearances perfectly rural (even the brigade village is scarcely more than a hamlet), the proportion of total gross output value attributable to commune and brigade industries is a staggering 93.4 percent. Annual per caput income from collective operations in 1981 was 602 RMB, while income from individual peasant enterprise (encouraged since 1978) was a further 130 RMB.

Eight enterprises

The brigade has eight major enterprises - factories for knitting, for knitting, nylon and polyester garments, woollen weaving, farm machine repairs, bricks and tiles, grain and fodder processing. The origin of this extraordinary development of rural industry lay in one small enterprise created in the Great Leap Forward of 1958 which employed eight families making gloves; the author was assured that no capital had subsequently been invested other than the profits of this first little enterprise and the successors which it financed.

The investment funds generated have been used in the first place to provide effective defences against flooding in the form of banks, drainage canals and underground ditches; to level the land for mechanized cultivation, to buy machines, and to pay for the whole of agriculture's annual inputs of fuel and chemical fertilizer.

Finally, no less than 70 percent of the incomes of the one-third of the population still engaged in agriculture is a subsidy from the profits of industry, while in the course of this subsidizing historic differences of per caput income between team and team have been eliminated.

Hongya county in Sichuan represents a different world. It is an area of high mountains, narrow ravines and rushing rivers. It is two hours of difficult driving from the nearest city. Rice cultivation is on terraces which cling to steep mountain sides, topped by alpine pastures and primaeval forest. Trees cover 48 percent of the county, 60 percent of which lies above 1000 m. About two-thirds of the arable consists of irrigated paddy. There is approximately an equal area of high pastures. The area is a sort of subtropical Switzerland.

Manufactures limited

Industrial possibilities include coal mining and the generation of hydroelectric power; about 60 percent of the county's output of each comes from commune and brigade enterprises. The development of manufactures is severely limited, however, by the cost of transportation to major markets.

Hongya's greatest opportunity lies in the development of forestry products. As about three-quarters of forest land is state-owned, the possibilities here for communes and brigades are limited, but present policy is to widen these opportunities of profit and accumulation in the villages by associating them with state forestry enterprises.

The second major opportunity lies in animal husbandry. This depends primarily on improving the breed of cattle. The Hongya animal husbandry station is fortunate in having two superb bulls presented by Pakistan and India, and after eight years of artificial insemination 30 percent of the cattle in the county are now hybrids. The hybrids are stronger working animals and give substantially higher yields of milk.

It was unfortunately impossible to conduct enquiries in Hongya comparable with those in Shandong and Jiangsu because the rainy season had started, making the mountain jeeptracks impassable, and the author had to be content with information given at the county level. In general, the picture was one of a lower level of development than in East China, partly because of the limits of commercial opportunities and partly because the two main developments - commune and brigade forestry and animal husbandry - have only been started recently and have relatively long gestation periods.

The most interesting aspect of local industry in Sichuan, however, lies in recent changes in organization that have eliminated some of the inflexibilities of the system as observed elsewhere. Since 1976, in China, in reaction to the arbitrary requisitions by higher levels that were unfortunately common during the Cultural Revolution, the different levels at which enterprise was operated have been rather strictly kept apart. County, commune, brigade and team enterprises were instructed to develop only out of their own resources and profits. While this prevented arbitrary requisitions, it also discouraged investment by the higher levels in the lower so that the flow of funds from the county or commune administration downwards to brigades and teams was limited. The new Sichuan system, already being spread to other parts of China, gives much more flexibility. In June 1982 in Sichuan the communes had already been abolished in name; what happened in fact (and this has since become national policy) is that the political responsibilities of the commune have been handed back to the xiang, formerly the lowest level of the political and administrative hierarchy, while its economic responsibilities have been vested in a variety of local agricultural- industrial-commercial trusts. Enterprises can now be freely founded by these "commune" trusts in association with brigades, teams and brigades across former commune boundaries; and they include new local supply and marketing cooperatives independent of the national system of such cooperatives which hitherto have held a monopsony shared only with other state trading organs. This has given a strong stimulus to grass roots enterprise in Hongya and in Sichuan generally, shown especially in the very rapid recent development of food processing industries. As these are directly linked to agriculture both as their source of raw materials and through their collective and individual peasant shareholders, one can expect an even closer link than before between enterprise profits and agricultural investment. This is especially important because although it has been state policy to encourage villages to process their own crops as the most natural basis of rural industrialization, in practice the fears of the official commercial institutions concerning quality control have prevented any great development. Hitherto only 8-10 percent of the output value of commune and brigade industry represented such processing. This will now change.

Degree of success

In conclusion, although there is no possibility at present of any rigorous analysis of the effectiveness of the use of enterprise funds for investment in agriculture, there is no doubt of its general effectiveness in the more prosperous (and more populous) provinces of China. The reasons for this degree of success appear to be as follows:

1. The enterprises, though they are independent units of account responsible in principle for their own profits and losses, are not units of ownership; the owner is the community, as commune or brigade or "agricultural-industrial-commercial trust." It is therefore the community which decides investment policy, even for the individual enterprises. Investment is thus determined by the community's overall priorities.

2. This community is basically a farming community, which can be depended upon to promote investment in agriculture; and the enterprise workers, being themselves members of farming families, are aware that the family income depends on both agricultural income and enterprise wages, and are quick to appreciate the possibility of fruitful relationships between agriculture and industry.

3. Party policy reinforces this emphasis by insisting that service to agriculture is the primary function of local enterprise.

4. The acceptance by the Chinese Communist Party of the need for a market dimension gives free play to an entrepreneurial spirit in the villages and ensures a degree of healthy (but not destructive) competition.

5. The state, by providing contracts through state trading agencies and supply and marketing cooperatives, and by offering subcontracts between the enterprises and state-sector factories, ensures a degree of stability and confidence which permits the forward planning of village investment of enterprise surpluses.

6. Finally, the diminution or abolition of the political responsibilities of the commune has significantly reduced the tendency to use, and abuse, the resources of the village for political purposes which may be in contradiction with the rational use of these resources in the interests of the village, leaving decisions more effectively in the hands of elected community and enterprise managers. This has undoubtedly played a major part in the very rapid development of commune and brigade enterprise since 1978.

It is reckoned that, on average, an investment of about US$1000 per ha is needed in China to complete the provision of irrigation and flood control, to level and improve the land, and to provide simple mechanization. On the evidence, if commune and brigade enterprise continues to develop at its present pace, such investment should be possible on about one half of China's agricultural production teams over about five years.